Auctus Fund, LLC v. Drone Guarder, Inc.

• Docket Number: CIVIL ACTION NO. 21-11193-WGY
• Decision Date: 14 February 2022
• Citation: Auctus Fund, LLC v. Drone Guarder, Inc., 588 F.Supp.3d 177 (D. Mass. 2022)
• Parties: AUCTUS FUND, LLC, Plaintiff, v. DRONE GUARDER, INC., and Adam Taylor, Defendants.
• Court: U.S. District Court — District of Massachusetts

588 F.Supp.3d 177

AUCTUS FUND, LLC, Plaintiff,

v.DRONE GUARDER, INC., and Adam Taylor, Defendants.

CIVIL ACTION NO. 21-11193-WGY

United States District Court, D. Massachusetts.

Signed February 14, 2022

Philip M. Giordano, Reed & Giordano, P.A. Giordano & Company, P.C., Charles R. Bennett, Jr., Murphy & King, PC, Boston, MA, for Plaintiff.

Patrick J. Dolan, Timothy M. Cornell, Cornell Dolan, P.C., Boston, MA, for Defendant Drone Guarder, Inc.

MEMORANDUM OF DECISION

YOUNG, District Judge¹

I. INTRODUCTION

The plaintiff Auctus Fund LLC ("Auctus") filed suit against Drone Guarder, Inc. ("Drone") and Adam Taylor ("Taylor") on July 23, 2021. Compl. & Demand for Jury Trial ("Compl."), ECF No. 1. The defendants Drone and Taylor moved to dismiss Count V (fraud and deceit). Mot. Dismiss, ECF No. 13. At the motion hearing held on January 20, 2021, Auctus withdrew Count V, rendering the motion to dismiss moot. Electric Clerk's Note (Jan. 20, 2022), ECF No. 28.

At the hearing, the Court asked the parties to explain why the Court has subject matter jurisdiction over the matter. Although neither party objected to the Court's exercise of subject matter jurisdiction, the Court expressed its concern that the only alleged basis for jurisdiction may be lacking. See McCulloch v. Velez, 364 F.3d 1, 5 (1st Cir. 2004) ("It is black-letter law that a federal court has an obligation to inquire sua sponte into its own subject matter jurisdiction.").

This memorandum explains the basis of this Court's subject matter jurisdiction.

II. BACKGROUND

A. Relevant Procedural History

On November 16, 2021, this Court ordered each party to submit its citizenship information because Auctus based federal jurisdiction solely on diversity of citizenship. Order, ECF No. 17. Both Auctus and Drone responded to the order on November 30. See Def. Drone Guarder's Resp. Court's Order Identify Citizenship Def. ("Drone's Resp. Order"), ECF No. 20; Pl.’s Resp. Nov. 16 Order, Ex. A, LLC Members, ECF No. 21-1.

B. Facts Alleged in the Complaint

Auctus is a Boston-based limited liability company, organized under the laws of Delaware. Compl. ¶ 4. Drone is incorporated in Nevada. Id. ¶ 5. Defendant Taylor is a resident of the United Kingdom. Id. ¶ 6. As is discussed later, see infra II.C., Drone's principal place of business is subject to dispute.

Auctus and Drone executed two transactions as part of Auctus's investment in Drone, each of which contained a Securities Purchase Agreement and Convertible Promissory Note ("Note"). Id. ¶¶ 10-12. The first set of transactions occurred on or about January 22, 2018, and the second on or about May 10, 2018. Id. ¶¶ 10-12. In the first purchase agreement, Auctus agreed to loan Drone $165,000. Id. ¶ 10. Auctus lent Drone an additional $125,000 in the second purchase agreement. Id. ¶ 12.

Each Note mandates that Drone pay a twelve percent interest rate on the principal amount that it received until the principal is paid off. Compl., Ex. B., Jan. 22, 2018, Convertible Promissory Note ("Jan. 22 Note") 2, ECF No. 1-2; Compl., Ex. D., May 10, 2018, Convertible Promissory Note ("May 10 Note") 2, ECF No. 1-4.

Taylor, who was the Chairman, Chief Executive Officer, and Chief Financial Officer of Drone, signed and executed two documents titled, "Affidavit of Confession of Judgment" ("Affidavits") for the agreements. Compl. ¶¶ 12, 13. In the Affidavits, Taylor "authorize[d] the federal courts and/or state courts located in the Commonwealth of Massachusetts to enter judgment against Borrower and Guarantor in the amount of ... One Hundred Sixty-five Thousand Dollars ($165,000.000), less any payments made on or after the date of this affidavit ...." Compl., Ex. E., Feb. 7, 2018, Affidavit of Confession of Judgment ("Feb. 7 Affidavit") 2, ECF No. 1-5; see also Compl., Ex. F., May 11, 2018, Affidavit of Confession of Judgment ("May 11 Affidavit") 2, ECF No. 1-6 (providing the same terms except for the amount due).

Auctus alleges that Drone violated the terms of the Notes in two principal ways: first, by failing to pay off the principal on time; and second, by failing to comply with a contractual reporting requirement with the Securities and Exchange Commission. See Compl. ¶¶ 17, 32.

On July 23, 2021, Auctus sued, naming Drone and Taylor as defendants. The complaint alleges seven counts: Count I asserts breach of contract; Count II breaches of the implied covenant of good faith and fair dealing; Count III unjust enrichment; Count IV breach of fiduciary duty; Count V fraud and deceit; Count VI negligent misrepresentation; and Count VII violations of the Massachusetts Consumer Protection Act, Mass Gen Laws ch. 93A, §§ 2, 11. Id. ¶¶ 35-68.

C. Disputed Facts as to Citizenship

Auctus's complaint states that Auctus is "a Delaware limited liability company with its principal place of business ... in Boston[,] Massachusetts 02116." Id. ¶ 4. "[T]he citizenship of a limited liability company ‘is determined by the citizenship of all of its members.’ " D.B. Zwirn Special Opp. Fund, L.P. v. Mehrotra, 661 F.3d 124, 127 (1st Cir. 2011) (quoting Pramco, LLC ex rel. CFSC Consortium, LLC v. San Juan Bay Marina, Inc., 435 F.3d 51, 54 (1st Cir. 2006) ).

There is no dispute about Auctus's citizenship. Its members are from the following U.S. states and foreign nations: (1) Massachusetts, (2) Pennsylvania, (3) Washington, (4) Florida, (5) France, (6) California, (7) New Jersey, (8) New York, (9) Hong Kong, (10) New Hampshire, and (11) Spain. See LLC Members. Thus, Auctus is a citizen of these eleven states and nations for the purpose of diversity jurisdiction.

There is no dispute about Taylor's citizenship either. Although counsel representing Taylor and Drone has failed to specify Taylor's citizenship, Auctus alleges that he is a citizen of the United Kingdom. Compl. ¶ 6.

Drone and Auctus disagree, however, as to Drone's principal place of business; Drone's response to the order is inconsistent with Auctus's complaint.

Auctus alleges that Drone is incorporated in Nevada and headquartered in London. Compl. ¶ 5. Drone, on the other hand, in its response to the Court's order, states that it is incorporated in Nevada but headquartered in California. Drone's Resp. Order 1. Specifically, Drone states that "according to the California Secretary of State, Drone Guarder does business and is headquartered in Torrance, CA." Id.

This factual dispute is critical. As will be explained, if Auctus is right, that would create a matter of first impression in this circuit. If Drone is right, then this Court lacks diversity jurisdiction -- since Auctus has a California-citizen member and thus is a citizen of California.

For the reasons explained below, the Court presumes that the complaint is correct -- that at the time of filing, Drone was headquartered in London.

III. SUBJECT MATTER JURISDICTION

To determine whether diversity exists in this case, the Court must resolve what appears to be a matter of first impression in this circuit, viz., whether federal courts have diversity jurisdiction over cases between diverse U.S. citizens joined by alien parties on both sides of the controversy.² Under Section 1332(a) of chapter 28 of the United States Code ("Section 1332(a)"), federal courts have diversity jurisdiction over cases between "citizens of different States and in which citizens or subjects of a foreign state are additional parties...." 28 U.S.C. § 1332(a)(3). The text of this statute, as well as the ultimate purpose of diversity and alienage jurisdiction make clear that federal courts have diversity jurisdiction in cases involving diverse U.S. citizens and alien parties on both sides.

A. Style Note

This memorandum discusses many cases and hypotheticals involving complex party assignments. To make this memorandum readable, it uses the following shorthand invented by Judge Debevoise in K & H Business Consultants v. Cheltonian, Ltd., with slight modifications. 567 F. Supp. 420, 421-22 (D.N.J. 1983).

The memorandum will use the letter "C" to denote the citizenship of domestic parties, the letter "A" to denote alien parties, and superscript numbers or letters to denote the state of citizenship. Thus, a case between a U.S. citizen and an alien is denoted by

C v. A

A Massachusetts plaintiff versus a New York defendant is denoted by:

C ^MA v. C ^NY

A superscript number denotes any state or country in general terms. Thus, any case involving two diverse domestic parties (without specifying their citizenship states) is denoted by:

C ¹ v. C ²

The following denotes any case involving two domestic parties from the same state, without specifying the state:

C ¹ v. C ¹

Additionally, the parentheses denote a corporation. A corporation that is incorporated in Delaware and has its principal place of business ("PPB") in London would be denoted by:

(C ^DE + A ^London)

Thus, for example, if the plaintiff is incorporated in Massachusetts with its headquarters in New York and the defendant is incorporated in California with its PPB in Illinois, that would be denoted by:

(C ^MA + C ^NY) v. (C ^CA + C ^IL).

If the plaintiffs are (1) an individual Massachusetts citizen and (2) a Delaware incorporated company with its PPB in New York, and the defendants are (3) a Massachusetts individual, (4) a Delaware incorporated company with its PPB in New York, and (5) a Nevada-incorporated company with its PPB in London, then:

C ^MA + (C ^DE + C ^NY) v. C ^MA + (C ^DE + C ^NY) + (C ^NV + A ^LONDON)

B. This Case Presents the Alignment of [C ¹ + A v. C ² + A]

As stated above, the parties disagree as to the location of Drone's principal place of business. Auctus's complaint avers that it is London. Compl. ¶ 5. Drone's response to the Court's order states that it is California. Drone's Resp. Order 1. At this stage of litigation, the Court presumes that Auctus's complaint is correct; that at the time of filing Drone was headquartered in London and is a citizen of the United Kingdom (as well as of Nevada, which is its place of incorporation).

Auctus is a citizen of many different...